Vale Poised for Massive Loss in Guinea

Having spent more than $1 billion developing its claims in Guinea's Simandou mountains, mining giant Vale (NYSE: VALE) is poised to have the entire investment lost as a governmental technical panel recommends stripping the miner of all its rights to explore the massive iron ore deposit.

Although the panel hasn't found any wrongdoing on Vale's part, the miner acknowledged as recently as last month in its annual Securities and Exchange Commission filing it might lose everything, and reports are now surfacing that is in fact what will happen.

A Dickensian taleGuinea is one of the poorest countries in the world, an irony lost on no one since it sits atop some of the richest mineral deposits found anywhere around the globe. The Simandou mountains are themselves a veritable bastion of untapped iron ore alone worth some $50 billion or more, but Guinea is also home to one of the world's largest reserves of bauxite, along with significant quantities of diamonds, gold, uranium, and even oil in the waters off the country's coast.

Mining interests in the country, however, are on lockdown at the moment as an outbreak of the deadly ebola virus is sweeping across Guinea and spreading to neighboring countries. The World Health Organization claims it's "one of the most challenging ebola outbreaks" it's ever been confronted with and it ravages an already impoverished nation.

A looming legal quagmireRio Tinto (NYSE: RIO) was granted exploration rights to Simandou in 1997 and subsequently given a concession to develop the deposit in 2006. Two years later, however, Guinea's dictator Lansana Conte charged Rio with being dragging its feet and stripped from it the rights to the northern half of the claim. Just before his death in 2008, Conte granted those rights to BSG Resources, which invested $165 million in developing the project, only to sell to Vale a 51% stake for $2.5 billion, $500 million of which was due up front with the balance paid over time.

A new democratically elected government of Guinea was ushered in in 2012 and immediately launched a probe into the transactions to determine whether bribery and corruption were involved in the bidding process. Vale halted payments to BSG when the corruption charges surfaced and the governmental inquiry subsequently found "precise and consistent evidence establishing with sufficient certainty the existence of corrupt practices" in how BSG won its mining rights. Last week, a panel endorsed those findings and the technical committee is now set to recommend stripping BSG and Vale of their concession.

Although BSG Resources has maintained its innocence since the allegations of wrongdoing were first leveled, but with the report declaring "These corrupt practices tarnish and thus void the mining titles and the mining convention," it will have little recourse than to seek international arbitration for what it claims are "incredible and unsupported" allegations.

It's estimated that reissuing the mining rights to Simandou could fetch the Guinean government upwards of $3 billion, and though some analysts contend in today's depressed iron ore market they might not go so high, prices are moving upward once more. Import prices of 62% iron ore fines at China's Tianjin port are running 14% above the lows hit in mid-March, as exports from Australia's Port Hedland, which accounts for roughly 20% of the seaborne trade, jumped 27% last month.

While Rio Tinto finalizes its investment framework, anticipating a bank feasibility study will be completed by early next year, Vale is confronted with the stark reality its investment is gone for good and an opportunity lost as the technical committee also recommends it be banned from being part of rebidding for rights. Ultimately, that could be an even greater loss for the miner.

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